STEP Journal featured article: Secure by design – a balanced scorecard approach to jurisdiction selection

Co-written by Steve Sokić, Chairman, Crestbridge Family Office Services

and Darrell King, Managing Director, Americas, Crestbridge Fiduciary

What is the issue for STEP Members?

It is still the case that, for many global wealthy families, jurisdiction selection for their trusts is not always based on a reasoned, balanced or logical analytical process.

What does it mean for STEP Members?

Against a backdrop of greater family mobility, geopolitical volatility and global diversification of family interests, jurisdiction selection is fast becoming one of the most pressing issues facing UHNW clients and their family offices today.

What can STEP Members take away?

Armed with a clear, balanced scorecard framework, members will be better enabled to help families arrive at reasoned and objective trust jurisdiction decisions and help reduce jurisdictional risk.

The fundamental purpose of structuring family wealth by using trusts, holding companies and/or other vehicles is to mitigate various risks pertaining to that wealth — and to the family.

The question of “where” to structure the wealth is one very important part of that risk mitigation exercise; one which is almost always considered but, regrettably, in practice, is not always based on a reasoned or balanced analytical process for many global wealthy families. In turn, this often gives rise to further (jurisdictional) risk exposure, something the planning process is intended to mitigate, not create more of. The case for a balanced scorecard framework is strong. It is a powerful tool in helping families to arrive at reasoned and objective jurisdictional decisions.

After all, the jurisdiction chosen is the ‘house’ where the family’s assets are held, often over generations, so that house had better be in order: robust, flexible and able to withstand various risks in the future.

The jurisdictional picture though, is not straightforward. Many jurisdictions now promote themselves as “family office destinations” or “asset protection trust” jurisdictions citing local rules regarding regulation exemptions or statutory limitation periods. A lot of that is ‘marketing fluff’ and lacks sufficient substance, at least across broader relevant considerations.

Scorecard

Whether looking at trusts onshore, offshore or ‘midshore’, often families and/or their advisors will make jurisdictional decisions based on familiarity, existing connections and their own perceptions – it’s human nature. But adopting a ‘balanced scorecard’ approach can be a helpful way to remove some of the often-unconscious bias and come to a more rational and objective decision.

A balanced scorecard, by definition, normally includes a number of relevant criteria, which are then are analysed and prioritized for a particular family’s circumstances, with the ability to ‘score’ each jurisdiction under consideration for a particular family. Key criteria would typically include:

Legal structuring tools & framework: legal or tax advice normally covers a specific type of vehicle(s) to be utilized to hold and administer a particular family’s wealth. These range from trusts and holding companies to limited partnerships, PTCs, segregated cell companies and more. Many jurisdictions have essentially ‘borrowed’ such vehicles from one another and factored them into their local legislation. For example, providing local legislative and/or jurisprudence clarity as to perpetuity periods, firewall legislation, settlor/grantor reservation of powers, purpose trusts, fraudulent conveyance rules and limitation periods, settlor/grantor capacity guidance, and other relevant matters.

Quality of court/judiciary: the importance of the rule of law cannot be overstated, particularly with the challenges and uncertainty in this regard in many parts of the world. Local courts and their judiciary are fundamental in ensuring this happens in practice. The questions to ask revolve around the history of integrity, quality and fairness of the local judiciary, and whether legal structuring tools have been sufficiently tested.

Regulatory framework adequacy: the main role of a regulator is to ensure the security of the family’s assets and data. They ensure the licencing of local trust companies and other professionals and ensure they are fit and proper, along with ensuring money laundering and proceeds of crime activities are properly protected against. Local regulation may also provide for important exemptions and frameworks for various wealth vehicles like Private Trust Companies (PTCs) and/or investment advice for a single-family group.

Quality of local firms and people: while jurisdictions provide the legal framework and ‘home’ for the tools required jurisdictions themselves do not ‘run’ those legal structures – that is done by local licenced trust companies and other professional firms – by real people, systems and processes. The quality of those local firms and people is thus a major risk mitigating factor for any wealth structure. A separate scorecard is normally advisable in this regard including criteria like ownership structure, strategic focus on private wealth, ‘bench strength’, regulatory history, client’s geographic affinity, systems, etc.

Proximity and connectivity: ease and frequency of communication, including in-person, is often a key ingredient in any wealth holding structure, regardless of its components. It naturally follows as to whether the jurisdiction offers good physical and digital connectivity and communication, and can demonstrate good digital infrastructure resilience?

Tax regime: taxation is important given its depleting effect on family wealth, but particularly important are the punitive, confiscatory, draconian and/or double taxation measures that could apply in complex cross-border family and asset circumstances. This is why most advisors will first seek a tax-neutral (low or no tax) jurisdiction to be utilised as a central base for the family’s wealth, to simplify matters for the family, and then focus on tax compliance and proper planning based on where individual family members are resident and/or where assets are located.

Privacy and confidentiality laws: ensuring privacy of one’s personal information is paramount for the security of many families worldwide, save for legitimate and secure sharing of information for tax, regulatory or other compliance requirements. Many argue that this is a human right, which is supported by, for example, the right to privacy and private life that is enshrined in certain declarations and conventions in the European Union. This criterion remains a top concern for families for a number of reasons, including political or social instability in their home countries.

Family home country rules: in many cases, the family members’ home countries (where they live) and/or the places where family assets are located, often have tax regimes that dictate, restrict and/or otherwise discourage use of certain jurisdictions (e.g. so-called ‘blacklists’).

Other connected jurisdictions: what on the surface may appear like one jurisdiction under consideration, may in fact be more than one. It’s important to understand the full jurisdictional picture. For example, inadvertent, multi-jurisdictional exposure has arisen often where larger trust companies have outsourced certain functions to related or unrelated companies in other normally lower-cost jurisdictions. (This normally requires local regulatory approval.) It follows then that most or all of the criteria outlined here ought also to be applied to such additional jurisdictions.

Political, social and economic stability: instability is one of the key risks families seek to mitigate to preserve their wealth. Accordingly, any jurisdiction in which wealth is structured must not only have a proven history of stability in this regard, but also ‘levers’ to allow for a change in jurisdiction where this stability comes into question.

Cultural affinities: wealthy families are human after all and have natural tendencies and affinities. These may include particularly strong personal cultural, societal, linguistic or other affinities with a specific location, and may well be a form of ‘tie-breaker’ between jurisdictions.

Global ranking indexes: there are certain independent rankings available that can evidence a jurisdiction’s particular qualities, like the Global Financial Centres Index (GFCI). These are, however, normally higher-level finance rankings, i.e. beyond wealth structuring, so their limitations should also be noted.

Intergovernmental agencies: jurisdictions globally are often, to varying degrees, exposed to implications arising from views of various intergovernmental agencies like the OECD or FATF, so it is prudent to also consider what those organisations have to say.

Personal experience: a family’s own experiences, connections and knowledge, even where limited or lacking, often form an important basis for considering jurisdictions. This can be either helpful or a detriment but should nonetheless be considered.

Notably, “cost” is not included among the criteria above, and this is by design. In practice, jurisdictions that perform poorly against these criteria typically have lower average costs, while those that perform well tend to be more expensive. This reflects fundamental principles of supply and demand, as well as the relationship between quality value and price.

As families look forward, jurisdictional selection will be critical in enabling them to achieve their objectives. Getting it wrong can be costly, disruptive, and leave a family open to future challenges and risks. Adopting a balanced and objective approach, however, can help diversify and mitigate risks, and provide a proper level of comfort and reassurance in meeting long-term estate and succession planning ambitions.